…this is the highest year-on-year inflation in the last 16 months

Inflation: The price of goods and services between November 2015 and November last year has increased by 3.92 percent, the highest monthly inflation last year, as revealed by the consumer price index (CPI).

This is 1.30 percentage points higher than October 2016 which was 2.62 percent. This means that between October 2015 and October last year, the price of goods and services increased by 2.62 percent.

The prices of foods have gone up 5.49 percent and non-foods by 2.90 percent. While the prices of domestic goods and services has increased by 5.05 percent, imported goods and services contributed 2.90 percent to the year-on-year inflation in November.

The consumer price index also revealed that the price of domestic food commodities increased by 7.77 percent and the price of imported food items by 3.70 percent. This means that the increase in price of locally produced goods and services have contributed more to the overall inflation.

Among the food items, the price of fish between November 2015 and November last year has increased by 7.5 percent. Prices of bread and cereals have gone up by 5.9 percent and vegetables by a staggering 13.12 percent.

Among the non-food basket commodities, fuel and lubricants prices increased by 5.13 percent, house rents by 5.24 percent and clothing by around four percent.

Inflation, a local economist said is sometimes seasonal. For instance the price of vegetables is bound to increase when the farming season is over.

CPI is one of the major indicators that determine the effectiveness of an economic policy. It is used to formulate fiscal and monetary policies and monitor their effect on the overall economy. In other parts of the world, business executives, labor leaders, and the private sector use CPI as a guide to make economic decisions.

The CPI also dictates the interest rates and other monetary policies. An increase in the supply of money typically lowers interest rates, which, in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending.

The Central Bank also uses the cash reserve ratio (CRR), which is the minimum requirement that commercial banks must set aside from their deposits with the Central Bank, to control inflation.  Higher CRR requirement translates into less money with banks to lend.

However, to determine the CPI, different weights are assigned to reflect the relative importance or contribution to the total consumption expenditures of all households. The present market basket has 151 items (436 varieties), which is updated periodically depending on the consumption pattern.

So the elasticity of goods and services influence the inflation rate because price inelastic goods like fuel, for instance, would impact inflation, since demand is not likely to fall, irrespective of an increase or decrease in price. So more weights are assigned to such commodities.

For collection of the prices of different commodities, the National Statistics Bureau has identified sample outlets, which are permanent establishments or retail shops from where monthly price of goods and services are collected.

Meanwhile, the overall inflation last year is expected to be the lowest in more than 10 years.

Tshering Dorji